Rotz & Stonesifer Financial Services Presents:
QUARTERLY ECONOMIC UPDATE
QUOTE OF THE
QUARTER
“Facing it, always
facing it, that's the
way to get through.
Face it.”
– Joseph Conrad
QUARTERLY TIP
Retired? Retiring
soon? A tax-efficient
withdrawal strategy
is vital. Which
accounts should you
draw from first, or
last? Take time to
review your options
and determine the
proper order of
distributions.
A review of 4Q 2015
THE QUARTER IN BRIEF
Thanks to a great October offsetting a flat November and a down December, U.S.
stock indices posted sizable gains during the fourth quarter. The Dow Jones
Industrial Average rose 7.00% in Q4, but even so, the blue chips lost 2.23% for the
year. In the last quarter of 2015, the Federal Reserve finally raised interest rates, the
slowdown in global manufacturing spread to America, and oil prices fell on the
NYMEX. Hiring totals were impressive, housing indicators mostly positive.
Terrorism, ongoing weakness in Chinese manufacturing, the oil supply glut, and
declining corporate profits and dollar strength all bred considerable anxiety among
investors.1
DOMESTIC ECONOMIC HEALTH
The quarter’s biggest financial story was the Federal Reserve’s big move – its
December 16 decision to raise the federal funds rate by a quarter of a point.
Investors widely expected a December rate hike, so the focus quickly turned to what
the Fed might do in 2016. Its December dot-plot chart showed a median projection
of 1.4% for the federal funds rate at the end of this year, 2.4% at the end of 2017, and
3.3% at the end of 2018.2,3
In November, annualized core consumer inflation was right at the central bank’s
2.0% target. The headline Consumer Price Index had risen just 0.5% in a year. Both
the headline and core CPI advanced 0.2% for October; in November, the core CPI
maintained that pace while the headline CPI was flat. The headline and core
Producer Price Indexes both rose 0.3% in November; they had respectively retreated
0.4% and 0.3% for October.4,5
Annualized wage growth had improved slightly to 2.3% by November, another
development likely influencing the timing of the Fed’s upward move. Employers
added 298,000 new jobs in October and 211,000 in November; by the eleventh
month of the year, the headline unemployment rate stood at 5.0% while the U-6 rate
tracking “total” unemployment stood at 9.9%.6
Personal spending was up 0.3% in November after a flat October; personal incomes
rose 0.4% in October, 0.3% in November. Retail sales merely inched up 0.1% in
October, 0.2% in November; minus auto buying, sales were actually up 0.4% for
November. As for consumer confidence, the Conference Board’s index went north
again, reaching 96.5 in November after a 92.6 reading in October. The University of
Michigan’s index ended November at 92.6.4,5
How much had the economy grown in the third quarter? As Q4 drew to a close, we
received the final answer from the Bureau of Economic Analysis: 2.0%, far from the
3.9% expansion in Q2. Indicators from the fall months made analysts wonder if GDP
would even reach 2% in Q4. The manufacturing PMI from the Institute for Supply
Management slipped lower and lower as the quarter went on – 50.1 in October, 48.6
in November, and 48.2 in December. So by ISM’s measure, the year ended with two
months of contraction in the U.S. factory sector. (In December 2014, the ISM
manufacturing PMI was at 55.1.) In contrast, ISM’s non-manufacturing PMI was
holding up well as 2015 ended, at 59.1 in October and 55.9 in November (though the
November reading was the lowest since May). Total durable goods orders were up
2.9% in October but flattened a month later. U.S. industrial output fell 0.4% for
October and 0.6% for November.4,7,8
GLOBAL ECONOMIC HEALTH
Leaders of China, the second-largest economy in the world, claimed that economy
would meet its 7% growth target for 2015, but their claims were met with some
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skepticism. China’s manufacturing sector appeared to be firmly in contraction
territory, with the nation’s official factory PMI at 49.7 when the quarter ended,
barely better than the 49.6 November reading that represented a 3-year low. The
Caixin manufacturing PMI for China was at 48.6 in October, a 6-month peak of 48.9
for November, and 48.2 for December; it was last above 50 in February. Economists
polled by Bloomberg see 6.9% GDP for China for 2015, 6.5% for 2016, and 6.3% for
2017. China’s official service sector PMI did reach 54.4 in December, its best mark
since August 2014. At quarter’s end factory PMIs in Japan (52.6), South Korea
(50.7), and Taiwan (51.7) were all showing sector expansion.9,10
The eurozone manufacturing sector seemed in good shape. Markit’s manufacturing
PMI for the euro area came in at 53.1 in December; manufacturing output had
accelerated at the fastest pace in 20 months. The European Central Bank expanded
the scope of its economic stimulus as the year ended, as the deflation threat to the
eurozone remained – annualized consumer inflation was at 0.2% the entire quarter,
and yearly core inflation was just 0.9% in December, nowhere near the ECB target of
2.0%.11,12
WORLD MARKETS
Gains outnumbered losses in Q3. China’s Shanghai Composite jumped 15.93%,
Germany’s DAX rose 11.21%, and Argentina’s MERVAL surged 18.96%. Other gains:
The U.K.’s FTSE 100, 2.98%; Australia’s ASX 200, 5.46%; Hong Kong’s Hang Seng,
5.12%; Indonesia’s Jakarta Composite, 8.74%; Japan’s Nikkei 225, 9.46%; Ireland’s
ISEQ, 10.12%; France’s CAC 40, 4.08%. The major regional indices also advanced in
Q3: the Asia Dow rose 3.35%, the Global Dow 4.03%, the Stoxx 600 5.19%, the
Europe Dow 1.32%, the Dow Jones Americas 4.98%, the MSCI World Index 5.11%,
and the MSCI Emerging Markets Index 0.26%.1,13
Fourth quarter retreats varied from major to minor. Russia’s RTS lost 4.14%; Brazil’s
Bovespa 3.79%, Spain’s IBEX 35 0.16%, Canada’s TSX Composite 2.23%, India’s
BSE Sensex 0.14%, and South Korea’s Kospi 0.08%.1
COMMODITIES MARKETS
The Thomson Reuters/Core Commodity CRB Index fell another 9.09% in Q4 and
sank 23.40% for the year. As for the U.S. Dollar Index, it logged a 2.37% Q4 advance
and gained 9.26% for 2015.14,15
Crude oil sank 17.85% during the quarter on NYMEX, ending the year at $37.04
after cresting the $50 level in early October. Unleaded gasoline futures fell 12.11% in
2015, which paled compared to the 20.55% descent for natural gas and the 37.12%
drop taken by heating oil.16,17
As Q4 concluded, gold settled at $1,060.50 per ounce on the COMEX, retreating
10.53% for 2015. Silver ended the year at $13.82, slipping 11.69% in 2015. Platinum
and copper fell harder: platinum lost 26.00% for the year, copper 25.09%. 17
Soft commodities fared best in the quarter. In fact, the five-commodity block of
Cocoa, cotton, coffee, sugar, and frozen concentrated orange juice rose 12.64% in
Q4, with sugar alone up 18.32%. It only gave back 0.74% on the year. Coffee
certainly had a rough year, slipping 21.54%; corn lost 9.36% in 2015, soybeans
13.07%, and wheat 18.88%. Cocoa futures advanced 9.07% in 2015, cotton futures
6.21%, and sugar futures 6.87%.17,18
REAL ESTATE
New home sales kept rising during the fall: up 10.7% in October, another 4.3% in
November according to the Census Bureau. Resales went in the opposite direction.
The National Association of Realtors recorded a 4.1% drop in October, then a 10.5%
plunge in November, possibly influenced by new home financing regulations that
delayed some closings. This development may have also affected NAR’s pending
home sales index, which fell 0.9% in November after a 0.2% October gain.4
Looking at some other key housing market indicators, October’s Case-Shiller Home
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Price Index rose 0.1% and displayed a year-over-year increase of 5.5% (this is the
20-city composite). U.S. housing starts declined 12.0% for October, but
groundbreaking picked up 10.5% in November. October saw a 4.1% increase in
building permits, and November brought an 11.0% gain in that category. 4
When the quarter started (October 1), Freddie Mac measured the following average
interest rates on home loans in its Primary Mortgage Market Survey: 30-year FRM,
3.85%; 15-year FRM, 3.07%; 5/1-year ARM, 2.91%; 1-year ARM, 2.53%. On
December 31, everything was higher: 30-year FRM, 4.01%; 15-year FRM, 3.24%;
5/1-year ARM, 3.08%; 1-year ARM, 2.68%.19
LOOKING BACK…LOOKING FORWARD
Along with the Q4 gains for the three major indices, the Russell 2000 improved
3.20% in the last three months of 2015. The CBOE VIX, the “fear index,” lost 25.67%
for the worst Q4 performance of any U.S. benchmark. Rising 17.83%, the Dow Jones
Internet index was the quarter’s top performer. On December 31, the most-watched
U.S. indices settled as follows: DJIA, 17,425.03; NASDAQ, 5,007.41; S&P, 2,043.94;
RUT, 1,135.89; VIX, 18.21. The 2015 performances of the “big three” are noted just
below; the RUT lost 5.71% on the year, the VIX 5.16%.1
% CHANGE
2015
Q4 CHG
1-YR CHG
10-YR AVG
DJIA
-2.23
+7.00
-2.23
+6.26
NASDAQ
+5.73
+8.38
+5.73
+12.71
S&P 500
-0.73
+6.45
-0.73
+6.37
REAL YIELD
12/31 RATE
1 YR AGO
5 YRS AGO
10 YRS AGO
10 YR TIPS
0.73%
0.49%
1.00%
2.06%
Sources: wsj.com, bigcharts.com, treasury.gov – 12/31/151,20,21
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.
How will stocks fare in the first quarter of 2016? They certainly fared poorly on the
year’s first trading day, when another global selloff prompted by a poor factory PMI
reading in China sent equity indices on three continents down 2-8%. One bad day
need not foretell the whole quarter, however. For stocks to regain momentum in this
and subsequent quarters, oil prices have to rebound at least slightly, corporate
profits have to rise (Thomson Reuters data shows they were flat last year, in contrast
to 8.3% improvement in 2014), Wall Street has to accept the long-planned slowdown
in China’s economy, and the dollar needs to be a little less dominant – a rather long
wish list. Even if the Fed winds up making just one or two upward moves in 2016,
the bulls will have some formidable challenges to overcome. Stocks advanced nicely
in the previous decade when monetary policy was tightened; with luck, perhaps they
will do just that this quarter, and this year.22,23
g
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This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their
affiliates. This information has been derived from sources believed to be accurate. MarketingPro, Inc. is not affiliated with any broker or
brokerage firm that may be providing this information to you. This information should not be construed as investment, tax or legal
advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or recommendation to
purchase or sell any investment or insurance product or service, and should not be relied upon as such. The Dow Jones Industrial
Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, marketweighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation
System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market
in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New
York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific
Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York
Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for
energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and
palladium markets, and the COMEX Division, on which all other metals trade. The SSE Composite Index is an index of all stocks (A and
B shares) that are traded at the Shanghai Stock Exchange. The DAX 30 is a Blue Chip stock market index consisting of the 30 major
German companies trading on the Frankfurt Stock Exchange. The MERVAL Index (MERcado de VALores, literally Stock Exchange) is
the most important index of the Buenos Aires Stock Exchange. The FTSE 100 Index is a share index of the 100 most highly capitalized
companies listed on the London Stock Exchange. The S&P/ASX 200 index is a market-capitalization weighted and float-adjusted stock
market index of Australian stocks listed on the Australian Securities Exchange from Standard & Poor’s. The Hang Seng Index is a
freefloat-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in
Hong Kong. The IDX Composite or Jakarta Composite Index is an index of all stocks that are traded on the Indonesia Stock Exchange
(IDX). Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched
index of Asian stocks. The ISEQ Overall Index is a capitalization-weighted index of all official list equities in the Irish Stock Exchange,
excluding U.K.-registered companies. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies
listed on the Paris Bourse. The Asia Dow measures the Asia equity markets by tracking 30 leading blue-chip companies in the region.
The Global Dow (GDOW) is a 150-stock index of corporations from around the world, created by Dow Jones & Company. The Dow
Jones STOXX 600 Index captures more than 90% of the aggregate market cap of European-based companies. The Europe Dow
measures the European equity markets by tracking 30 leading blue-chip companies in the region. The Dow Jones Americas Index
measures the Latin American equity markets by tracking 30 leading blue-chip companies in the region. The MSCI World Index is a freefloat weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging
Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The RTS Index
(abbreviated: RTSI, Russian: Индекс РТС) is a free-float capitalization-weighted index of 50 Russian stocks traded on the Moscow
Exchange. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on
the Sao Paulo Stock Exchange. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain's principal stock
exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock
Exchange (TSX) as measured by market capitalization. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted
index composed of 30 stocks that started January 1, 1986. The Korea Composite Stock Price Index or KOSPI is the major stock market
index of South Korea, representing all common stocks traded on the Korea Exchange. The US Dollar Index measures the performance of
the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency
fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the
market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Past
performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when
originally invested. All information is believed to be from reliable sources; however we make no representation as to its completeness or
accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged.
Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional
services. If assistance is needed, the reader is advised to engage the services of a competent professional.
Citations.
1 - online.wsj.com/mdc/public/page/2_3022-quarterly_gblstkidx.html [12/31/15]
2 - marketwatch.com/story/federal-reserve-lifts-interest-rates-for-first-time-since-2006-2015-12-16 [12/16/15]
3 - marketwatch.com/story/federal-reserve-dot-plot-still-signals-4-interest-rate-hikes-in-2016-2015-12-16 [12/16/15]
4 - tradingeconomics.com/united-states/calendar [1/5/16]
5 - briefing.com/investor/calendars/economic/2015/12/07-11 [12/11/15]
6 - forbes.com/sites/samanthasharf/2015/12/04/solid-jobs-report-211000-jobs-added-in-november-unemployment-rate-unchanged-at-5/ [12/4/15]
7 - ycharts.com/indicators/purchasing_managers_index [1/4/16]
8 - tradingeconomics.com/united-states/non-manufacturing-pmi [12/3/15]
9 - bloomberg.com/news/articles/2016-01-03/two-speed-china-economy-intact-as-factories-slump-services-gain [1/3/16]
10 - channelnewsasia.com/news/asiapacific/china-caixin-pmi/2396354.html [1/4/16]
11 - tradingeconomics.com/euro-area/manufacturing-pmi [1/2/16]
12 - usatoday.com/story/money/2016/01/05/eurozone-inflation-holds-steady/78293758/ [1/5/16]
13 - msci.com/end-of-day-data-search [12/31/15]
14 - investing.com/indices/thomson-reuters---jefferies-crb-historical-data [1/5/16]
15 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [1/5/16]
16 - seekingalpha.com/article/3787286-energy-fourth-quarter-review-and-the-outlook-for-2016 [1/4/16]
17 - money.cnn.com/data/commodities/ [12/31/15]
18 - seekingalpha.com/article/3787336-soft-commodities-fourth-quarter-review-and-the-outlook-for-2016 [1/4/16]
19 - freddiemac.com/pmms/archive.html [1/5/16]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F31%2F10&x=0&y=0 [12/31/15]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F31%2F10&x=0&y=0 [12/31/15]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F31%2F10&x=0&y=0 [12/31/15]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F30%2F05&x=0&y=0 [12/31/15]
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20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F30%2F05&x=0&y=0 [12/31/15]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F30%2F05&x=0&y=0 [12/31/15]
21 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [1/4/16]
22 - money.cnn.com/2016/01/04/investing/china-stocks-pmi-factory-halted/ [1/4/16]
23 - usatoday.com/story/money/markets/2015/12/31/5-things-doomed-stocks-2015/78082716/ [1/1/16]
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